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Ruling

Subject: Foreign income - pension

Question 1

Is the pension that you receive from Country X assessable in Australia?

Answer

Yes.

Question 2

Are you entitled to a deductible amount of the Undeducted Purchase Price (UPP) of your pension from Country X?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You receive a pension from Country X.

You contributed to your pension during your working life in Country X.

Australia has a tax treaty with the Country X.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1936 Section 27H

Income Tax Assessment Act 1936 Subsection 27H(2)

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Section 5

Reasons for decision

Summary

The pension that you receive from Country X will have to be included in your assessable income; however, as you have contributed to this pension, you are entitled to a deductible amount for the Undeducted Purchase Price (UPP) of your pension. This will reduce the taxable amount of your pension.

Detailed Reasoning

Sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provide that the assessable income of an Australian resident includes their ordinary and statutory income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Superannuation pensions are included in assessable income under section 27H of the Income Tax Assessment Act 1936 (ITAA 1936).

In determining the liability of an Australian resident to Australian tax on foreign sourced income, it is necessary to consider not only the Australian tax laws but also any applicable tax treaty.

Tax treaties are given the force of law domestically by the International Tax Agreements Act 1953 (the Agreements Act).

The Agreements Act states that where there are inconsistencies with an Act imposing Australian tax, the Agreements Act will prevail (except in relation to tax avoidance schemes).

The article of the tax treaty between Australia and Country X that deals with pensions provides that pensions (including government pensions) paid to a resident of Australia shall be taxable only in Australia.

Accordingly, as you are a resident of Australia, the pension that you receive from Country X is required to be included in your assessable income.

Undeducted Purchase Price

The UPP is the amount that you have contributed towards the purchase price of your pension.

Subsection 27H(2) of the ITAA 1936 operates to reduce the taxable amount of a pension received by the personal contributions made by a taxpayer for which no income tax deduction was allowed. This applies regardless of whether the fund paying the pension is located in Australia or overseas.

As such, the part of your annual pension which represents a return to you of your personal contributions is free from tax. This tax-free portion is called the deductible amount of the UPP.